I graduated from a College that had a top fiction writing program. In addition to my advertising, journalism, marketing, technical and PR writing courses I practically took enough fiction writing courses (minus 1-2) to have a formal major in that course of study.
A major problem I see with the public funding of the arts is that it is virtually impossible to provided a non-biased allocation of the funds. The "fine arts" community is as biased as any in academia. The "approved" art is narrowly defined, and the funds allocated accordingly.
Now, for a non arts comparison, small business people can get loans to support their ventures, also with limiters and restrictions on who gets the funding. Some are common sense and objective, from a business plan standpoint for example, and others are artificial and formally biased such as a women or minority status. Still, fairly objective criteria hopefully in tune with a proper business model.
To get back to the arts, the funding criteria is almost all biased and subjective. Who gets the money depends on the art fashion of the day. Don't produce the fashion, don't expect the cash. When I was in school the genre de jour was "the gritty urban tale." Anyone who has suffered through
Last Exit to Brooklyn will be familiar with this noir style of urban hopelessness. It was interesting to see, week after week, suburban white kids getting all gritty and urban and racial with their writing assignments -- posers of the highest order with no life experience to back up their material. But that didn't matter as long as it was gritty and shocking and fit the other style elements.
Now, the fine arts set would be appalled to hear Hubert Shelby's works being called genre fiction (fiction that follows a set style and structure for popular consumption, along the lines of romance novels, sci-fi/science fiction, police procedurals, etc.). The most basic genre fiction being the romance novel "bodice ripper" style where the plot formula is rigid and you practically just insert new characters and a new location with each book. Much like Star Trek the Next Generation or a sitcom like Three's Company or According to Jim.
Of course, tale after tale from Shelby followed exactly the same pattern -- gritty urban transsexual heroin prostitute gets a bunch of character development, a lot of overloaded description of the scene with little plot and a final orgasmic horrible death for the dark main character reflecting the hopelessness of life etc... ad nauseam. And shocking -- must be edgy and shocking! The literary art version of poop in a cat food can.
Now any attempt to write what they defined as "popular/genre fiction" -- basically anything that would be even remotely popular to a mainstream audience or to a science fiction audience, etc. was strongly discouraged. As was actually finishing a work with a beginning, middle, end. An awful lot of scenes that went nowhere, toning a writing style of overloaded description like you find in Flaubert's "classic" Madam Bovary. Another book you only read if you have to for a class or for elitist peer acceptance

Here's an example of the MFA writing style, I just pulled out of my ass:
Clint, looked long and hard down the dark alley. Raindrops, like the sweat off a 54th street hooker's bellybutton ran in spidery rivulets down the dark brooding dumpsters, reeking with the half eaten refuse of the broken dreams of life in the big city. Clint pulled a Marlboro from the pack he always kept in the pocket of his tattered green with grey striped flannel shirt. It was a warm shirt, and he liked warm in the cold dampness of metropolis. He remembered briefly, when his mother bought him that shirt two years past at the Ogden Pickle Festival. Happy times. Mom was off the bottle that year, and dad had yet to come out about his attraction to men... (Jump ahead 2 pages)
"...I'll be dammed, they look just like snakes -- dark gritty urban snakes," Clint said to himself, of the pair of pantyhose stretched over the widow sill. After three pages of mind numbing gritty description, Clint had forgotten why he was looking down that dammed alley in the first place. Could it have been related to his first foray into male prostitution to support his girlfriend's heroin habit? Perhaps. Maybe. The readers sure the hell had lost track. And yet they would receive no respite from the darkness. They had to analyze elements of the book for class tomorrow. Or they needed a few useful quips to WOW Shiela with at the party over the weekend, because she was a very kinky girl and had a thing for dark, artsy types...
Oddly, none of my MFA student instructors were published outside of scholastic circles, nor were the department heads with the exception of 1-2 low run titles perhaps. They all had a work "in progress" they all were, I'm sure, receiving grant money and school support. The Arts racket, as far as I could tell, existed to support living the carefree artist's life without being encumbered by the need to have a significant audience for the work in question. The main audience for those that published their works were, I firmly believe, fiction writing and literature students given no choice but to buy these assigned texts and a small subset of the hipster crowd. IMO a closed-cycle art funding sponge that couldn't exist on its own, or that could but as more of a hobby than vocation. And there's nothing wrong with with producing art as a hobby! Better than time spent in front of the tube.
Before the internet you could perhaps argue that publishing houses and record labels limited the ability to get your work to the masses. In the internet age anybody can publish and produce. For sculptors and painters, etc. there have always been galleries and the elitism of that scene is it's own universe. Grant money just allows you more time to tailor your work to "sell" to that crowd.
And what's wrong with art for arts sake? If you like creating art and want to share it with others, then the Internet makes that easier than ever. If you want to earn a living at art then maybe the market should decide. Again, with the Internet an artist has more access to a paying audience than ever before. Even a niche artist can market his or her product to the small subset that appreciates it on an international basis -- multiplying the profit potential.
The best teacher I had in my fiction courses was one of the few black sheep of the program: Phyllis Eisenstein. An actual published author with over nine novels in science fiction and fantasy. The only one (aside from my screen writing instructor, who also earned a real living in the trade) pushing plot and movement and telling a full story from beginning to end. She earned a living with her work. Not a great living, compared to the big name genre guys, but a chance to get a few bucks doing what she enjoyed. No chance for her to get grant money -- wrong type of writing. She just went out and did it the old fashioned way -- she earned it.
Charon